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Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition

Vicente Cuñat () and Maria Guadalupe ()

No 2408, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers in the form of wage structures, promotion profiles, and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labor market outcomes of these workers. We find that higher foreign competition leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing wage increases while lower-ranking executives see their wages fall. Third, higher competition is associated with a higher probability of leaving the firm. Finally, we show that higher foreign competition also is associated with a higher demand for talent at the top of the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

Keywords: foreign competition; demand for talent; promotions; job turnover; wage ladders; wage structure; performance-related-pay; incentives; globalization; product market competition (search for similar items in EconPapers)
JEL-codes: J31 L1 M52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006-10
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Published - published in: Journal of Labor Economics, 2009, 27 (2), 179-212

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Journal Article: Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition (2009) Downloads
Working Paper: Globalization and the provision of incentives inside the firm: The effect of foreign competition (2009) Downloads
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